How to Invest in Large Real Estate Projects as a Passive Investor
4 Ways to Invest in Larger Projects as a Passive Michigan Real Estate Investor
“The key to financial freedom and great wealth is a person’s ability or skill to convert earned income into passive income or portfolio income.”
Why Invest Passively?
At the heart of passive investing you are giving someone else, hopefully an experienced investor or team of investors, use of your money in return for a preferred return without having to work harder for it yourself. Ideally, you want to do it in such a way that you receive regular income or dividends, a large payout when the project is sold or refinanced and favorable tax treatment as passive income with depreciation.
Passive income is usually taxed at a lower rate than active income and is one of the big advantages of investing this way. Additionally, investing in larger real estate projects usually means higher returns.
Not all forms of passive investing are the same and offer varying levels of returns, risks and tax advantages.
What are the Two Types of Passive Investors?
The two basic types of passive investors are accredited and non-accredited investors (sophisticated investor).
Accredited Investors
An individual who has made more than $200,000 the past two years or a couple that has made more than $300,000 the past two years.
Individually or jointly with a spouse you have a net worth over 1 million dollars excluding the value of your primary residence.
Non-Accredited (Sophisticated)
These individuals do not have a high net worth but have significant investing experience and ideally a good relationship with the sponsor of the investment or project opportunity.
What are the Advantages of Commercial Real Estate?
Passive Income: Investors can earn monthly or quarterly income from rents or leases without giving up their time.
Hassle-Free: Once they have done their due diligence on the sponsor and investment opportunity, there is nothing to do but collect checks from a passive investment (well mostly—you still have to file your taxes).
Tax Benefits: The income is usually taxed at a lower rate as passive income and also the tax benefits of real estate like depreciation on the investors K-1 tax filing.
Control: Some forms of passive investing give the investor more control than others in the deal or deal selection.
Appreciation: The value of the property or properties should increase in value over time to be realized when refinanced or sold.
Diversification: Investing in real estate passively diversifies your overall portfolio of investments and you can also invest in a diversified collection of properties.
What are the Cons of Passive Investing in Larger Real Estate Deals?
Lack of Control: Most passive investing gives the investor very little control or say in how the project or fund is run.
Market Cycles: All investing involves risk and passive investing is at the whim of how well the market or economy is doing at that particular time to some degree.
Length of Investment: Some passive investing opportunities may be for a short period of time, but most require many years to see the full benefit.
Liquidity: Some forms of passive investing allow you to take your money out or at least part of your money in an “open” type fund or not at all in a “closed” type fund.
Returns: Not all passive investing options offer the same returns.
Due Diligence: Investing passively in larger real estate deals may require specialized knowledge of the specific offering and/or the sponsor of a fund.
Investment Minimums: Typical minimum investments range from $25,000 to $50,000 but can be higher or lower.
Taxes: Depending on the type of investment selected, passive investors may have to file taxes in the state the property is located and the state where they reside.
Diversification: Some passive investment opportunities may be for just a single project.
Risk: There is always a risk of loss but that risk can be mitigated by doing your due diligence on the project, fund and sponsor.
What are the Four Ways to Invest Passively in Larger Real Estate Projects in Michigan?
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Syndications can be for a single project or for a fund.
The funds can be to loan money to fix and flip investors or developers or for equity or down-payments on bigger projects.
They can included accredited investors and non-accredited investors.
The passive investor is usually the Limited Partner or L.P. and the syndicator or sponsor is the General Partner or G.P.
Online platforms can be syndicators like Crowdstreet, Fundrise and RealtyMogul.
Syndications are a form of security and regulated by the SEC and need to be set up properly.
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Funds are a type of syndication.
Funds can be to pool investor money to loan out to fix and flip investors or developers.
Funds can also be equity funds to help with down-payments on larger real estate projects.
Syndications are a form of security and regulated by the SEC and need to be set up properly.
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Typically invest in one type of real estate like residential, shopping malls, self storage, etc. but some invest in a diversified portfolio of real estate.
Offer returns in the form of dividends.
The dividends are taxed at the higher income rate and treated like regular income.
No actual tax benefits from real estate like depreciation.
REITs are traded like stocks and are more volatile.
REIT’s are also regulated by the SEC
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Joint ventures are not technically a form of passive investing.
It is a way to bring in a joint venture partner with money to do the deal so long as you both contribute actively to the project.
One advantage of joint venturing is that returns can be realized as soon as the project is generating money by all joint venture partners.
Joint Ventures are not regulated by the SEC.
How Can a Real Estate Professional add Value Investing Passively?
• A real estate professional should be educated on all forms of passive investing in larger real estate projects and funds.
• A real estate professional can help educate you on which form of passive investing will help you raise money for your project or allow an investor to enjoy returns passively.
• A real estate professional should know the pro’s and con’s of each passive investment options.
How Investing Passively in Larger Real Estate Deals in Michigan Can Increase Your Returns and Give You More Time Freedom?
Passive investing in larger real estate deals is a great way to diversify your investment portfolio. The returns are greater in larger real estate deals but you must do your due diligence on the project or fund and the track record of the sponsor. Passive investing is not without its risks but the returns are favorable and many times your gains are taxed at a lower rate as passive income along with offsetting that income with real estate depreciation.
Passive investing is a great way to increase your income without spending your time actively working to earn it.
Real estate professionals can educate you on the passive investment options and how you can use passive investing to fund your larger real estate projects or just create passive streams of income and more time freedom.
Want to learn more? Contact us.
Disclaimer:
Always speak to your CPA, investment advisor and attorney before making any investment decisions. Past performance does not guarantee future returns. Arbor Advising seeks to educate and does not endorse any specific product, service or investment.
